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John Stoltzfus at Oppenheimer has pointed out, however, that the wild response on Wall Street wasn’t exactly monumental when taken in context.
“Jarring as the outcome of the Brexit vote was to the markets last Friday it was less about panic and more about a knee-jerk reaction,” Stoltzfus said Sunday in a note to clients.
While Friday’s drop in the Dow Jones index was its eighth-largest by point total, Stoltzfus, who is Oppenheimer’s chief market strategist, noted that by percent drop it wasn’t even as big as the sell-off in August. Essentially, as the index climbs toward all-time highs, big point-value swings will exaggerate actual selling activity.
Andrew Lapthorne at Societe Generale similarly said Monday that the market’s initial sell-off had as much to do with the huge gains from earlier last week as it did with the vote itself.
“The ‘surprise’ Brexit result and the dramatic market reaction was in our view as much to do with investor complacency beforehand as it was to do with the shock outcome,” he wrote in a note to clients.
Lapthorne noted that the MSCI World Index, which fell 4.9% on Friday, was off only 1.2% since June 16. In the same vein, the 10% crash of the pound against the dollar on Friday left it 3.1% off its position from June 16.
“The market was truly shocked by the Brexit result but that is only because it had spent the previous week anticipating exactly the opposite result,” Lapthorne said.
This doesn’t mean everything is peachy keen, mind you; it just suggests that the middle-term reaction may not be as terrible as the short run appears. In fact, Stoltzfus thinks the US market will realize quickly that the core of the US economy is still strong and react accordingly.
“Follow-on selling to Friday’s action may occur into today’s stateside opening and wouldn’t be surprising,” he wrote.
“That said, we see opportunity for US markets to turn up by the middle of or later in the week. It appears to us that the stateside economy, with 70% of its growth anchored by the consumer, won’t be severely impacted by what is happening across the pond.”